Federal Budget Summary 2006/07 – Superannuation Reform

The Government has proposed sweeping reforms to the existing superannuation system in Australia, with effect from 1 July 2007.

At this stage, these proposed reforms remain open to public comment (as called for by the Government) until 9 August 2006.

Although these proposed reforms have not been enacted by parliament and no draft legislation have been released, it is expected that these superannuation reforms will likely be implemented as the Coalition Government currently has an upper and lower house majority.

Proposed superannuation reforms

It is anticipated that most of the major changes proposed to the current superannuation system are to be effective from 1 July 2007.  However, we note that it has been proposed that some changes will take effect from 9 May 2006.  Notably, the key proposed changes are as outlined below:

• that the reasonable benefits limit would be abolished and existing pension incomes will become tax free with effect from 1 July 2007;

• that subject to some exceptions, benefits paid from a taxed superannuation fund either as a pension or a lump sum to those aged 60 years or over would be tax-free;

• that the requirement for a compulsory cash-out from superannuation upon reaching a certain age will be abolished;

• that a maximum of AUD $150,000 per year can be contributed per person as an undeducted contribution (without taxation), and/or an AUD $50,000 deductible contribution (taxed at 15% upon contribution) subject to certain transitional provisions.  Previously, there was no limit for undeducted contributions.  Any additional undeducted contributions will be returned to the contributor and any additional deductible employer contributions will be taxed at the highest marginal tax rate.  Upon passing of the relevant legislation, this will take effect retrospectively from 9 May 2006.   

• It is still unclear as to how roll-overs from foreign superannuation funds will be taxed going forward. 

Further developments

While no legislation has been released regarding the proposed superannuation changes, the Treasurer made a Press Release on 13 June 2006 (No. 58) confirming that Treasury will allow the AUD $150,000 per year cap for undeducted contributions to be averaged over 3 years.  This means that a couple will be able to together contribute AUD $900,000 in one lump sum (or $450,000 per person).  Upon making such lump sum contributions, no further contributions will then be allowed for the next 3 years.

This information has been prepared in good faith, is in the nature of general comment only, and neither purports, nor is intended, to be advice on any particular matter.  You should not act or rely upon any matter or information contained in or implied without taking appropriate professional advice which relates specifically to your particular circumstances.  The authors and consultants expressly disclaim all and any liability to any person (whether a reader or not) who acts or fails to act as a consequence of reliance upon the whole or any part of this information.